Becoming a 501(c)(3) organization
Nonprofit organizations are private corporations that operate for the public benefit. 501(c)(3) is a section of the Internal Revenue Service (IRS) tax code pertaining to a certain classification of nonprofit organizations. Organizations obtaining the 501(c)(3) designation are exempt from paying federal income tax and charitable contributions to those organizations may be deducted from contributor's federal income tax. Additionally the 501(c)(3) designation is generally required to obtain federal and state grants, as well as grants from most foundations. Watershed associations are generally eligible to become a 501(c)(3)s.
The advantages of becoming a 501(c)(3) include:
- Being exempt from federal income tax
- Possibly being exempt from some state taxes: In PA, state sales tax can be exempted
- Being eligible to apply for and receive grants from government and foundations
- Enjoying limited corporate liability protection (actually from incorporating)
- Having the stature of being a 501(c)(3)
Disadvantages are the costs, hassles, and restrictions associated with becoming and maintaining 501(c)(3) status. The organization can assume it will take the better part of a year (or longer) to jump through the necessary hoops which will require a substantial diversion of the organization's resources in the process. With filing and attorneys' fees, the initial costs can easily exceed $1000. The use of an attorney and/or accountant is not absolutely necessary, but be warned: doing it yourself can be a daunting experience fraught with numerous pitfalls. The organization will have to maintain its books using generally established accounting practices and will have to file an annual report to the IRS. Allowing for audits on a regular basis is a good thing to keep the IRS, as well as contributors and the board of directors happy. All of this takes time and money, although it can be argued that these are resources wisely spent.
Lobbying is a restricted, although not entirely prohibited activity for the 501(c)(3) organization. The law reads that "insubstantial" lobbying is allowed, yet the term "insubstantial" is not defined for this context. As a result varying interpretations can come into play, so the organization needs to approach any lobbying activities cautiously. A 501(c)(3) organization should not exceed an average of 20% of its resources going toward lobbying and under no circumstances should the organization engage in electioneering.
If your organization is not yet sure about or ready to become a 501(c)(3) but wants to be able to obtain a grant to do a worthy project, fiscal sponsorship may be the answer. Simply put, fiscal sponsorship means another organization already having its 501(c)(3) may apply for the grant on your behalf. The sponsor will take care of the books and administer the grant, while those in your organization may provide much of the manpower in executing the grant. This frees your organization to concentrate on its primary mission without getting wound up in all the paperwork and other legal necessities. This service usually comes at a cost: the fiscal sponsor will usually charge a percentage of the grant to administer it. Choose a fiscal sponsor having a similar and compatible mission to your own, and choose carefully... there are good deals and not so good deals. (See About.com's topic Fiscal Sponsorship.)
About.com's Starting a Nonprofit Organization: One-Stop Answer Page (Some links included below)
Answer These Questions
Read this first. You should be able to answer
the five questions listed here before you begin.
A summary of what you should know
before you begin.
Do I Need to Incorporate?
Anthony Mancuso has put together helpful FAQs.
Putnam Barber and associates answer
some important questions.
A Primer on Nonprofit Organizations by Gita Gulati-Partee
Forming a Non-Profit 501(c)(3) Federally Tax Exempt Corporation in Pennsylvania to Pursue Environmental or Citizen Activism ... a Manual by The Community Environmental Legal Defense Fund (CELDF). This is a step by step manual on starting up your non profit organization in PA. This is a particularly useful document.
The Internet Nonprofit Center is the categorized repository of a great deal of Frequently Asked Questions regarding nonprofit organizations. Lots of good info.
Pennsylvania Association for Nonprofit Organizations' Tips on How to Become a Nonprofit Organization in Pennsylvania
A widely used resource is Anthony Mancuso's book How to Form a Nonprofit Corporation in All 50 States published by Nolo Press. This book includes a disk with outline copies of all the forms and documents needed in the process for modification using a word-processing program. You can purchase the 4th edition online through Amazon.com by clicking on this link (and the Nonprofit FAQ will receive a royalty from Amazon which we will use to maintain this resource for nonprofits): Order How to Form a Nonprofit Corporation.
The newest (fifth) edition of the "Pennsylvania Nonprofit Handbook: Everything You Need to Know to Start and Run Your Nonprofit Organization" is now available. This 294-page publication is a veritable A-Z guide for new and established nonprofits in Pennsylvania. For more information, you can contact Pennsylvania Association for Nonprofit Organizations at 717-236-8584 or visit their bookstore for more details.
A very user-friendly, readable guide to for nonprofit
organizations is the Nonprofit Kit for Dummies (With CD-ROM) by Stan Hutton,
Frances Phillips. It is
available online through Amazon.com.
If all this stuff is new to you, this not a bad reference.
Fiscal Sponsorship: 6Ways to Do It Right by
Gregory L. Colvin (paper, 82 pages, ISBN 0-936434-65-1, $14.95 plus $5.50
shipping & handling) describes six models of sponsorship that have been approved
and accepted by the IRS. It details how they are supposed to work and why, how
they differ and how they are similar. It's available
Western Pennsylvania Conservancy's Watershed Assistance Program was developed to provide assistance to watershed groups. Through a PA Growing Greener Technical Assistance Grant, they can help you group in establishing your 501(c)(3).
Susquehanna River Basin Commission is establishing a technical assistance
program for watershed organizations in the Pennsylvania portion of the
Susquehanna basin. This assistance program is intended to provide information to
emerging and existing watershed organizations on certain legal issues. The
information will be provided in the form of workshops in 2002 and 2003 and
through a web-based clearinghouse that is currently under development. The
purpose of SRBC's Legal Technical Assistance program is to build and enhance the
capacity and sustainability of watershed organizations by providing selected
information on issues, including 501(c)3 non-profit status and Articles of
Pennsylvania Association for Nonprofit Organizations (PANO) offers its members start-up technical assistance.
The Community Environmental Legal Defense Fund (CELDF) offers start-up support for environmental organizations. Through the Grassroots Administrative and Technical Support Program, the Legal Defense Fund provides incorporation and IRS 501(c)(3) processing services for groups, provides general legal research, responds to general legal inquiries, and assists organizations with fundraising. Also be sure to check out the Grassroots Grantee Network.